Notes.docx - Lecture 2 \u2013 Audit Regulation Structure of the Profession and Auditor\u2019s Liability When Auditor doesn\u2019t perform correctly AUDITOR\u2019S

Notes.docx - Lecture 2 u2013 Audit Regulation Structure of...

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Lecture 2 – Audit Regulation, Structure of the Profession and Auditor’s Liability When Auditor doesn’t perform correctly AUDITOR’S LIABILITY Auditors are exposed to legal liability in 3 ways: 1) Contract law – sue on the terms 2) Corporations Act 3) Tort of Negligence – duty of care to 3 rd parties Reasonable Care and Skill: An Auditor has a duty to exercise the reasonable care and skill expected of a professional auditor Requires adherence to regulatory and professional standards in all aspects of an audit. ‘The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status’ (Caparo, 1990). Negligence: Negligence: any conduct that is “ careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person/s ”. Donoghue v Stephens An Auditor would be deemed to have been “negligent” where they made a judgement or error that a normal, reasonable Auditor would not have made in the same situation. Claims for Negligence: To be successful in a claim for negligence, a plaintiff must prove that: 1) A Duty of Care was owed to the plaintiff by the defendant – relationship of Proximity (direct relationship) - Client (BoD or entire shareholders) & Auditor: DOC through the engagement letter (contract) - 3 rd parties: (individual shareholder still a 3 rd party) Proximity only through – a Privity letter/contract 2) There was a breach of the duty of care as the Auditor did something a reasonable Auditor would not have done 3) It resulted in an inappropriate Audit report which was relied upon by the plaintiff 4) Financial Loss or damage was suffered by the plaintiff as a result - Causation – flow on effect; due to the Auditor’s negligence this happened Note: A causal relationship existed between the breach of duty and the harm suffered by the plaintiff. Liability to Clients: Liability to clients arises both in Contract and under the Tort of Negligence (3 rd parties – shareholders, creditors) Key cases include: London & General Bank Ltd (1895) – owe 3 rd parties DOC Kingston Cotton Mill (1896) – Auditor is a watchdog Thomas Gerrard & Son (1967) Pacific Acceptance (1970) – codified what Auditors must do
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Kirby v Centro Properties (2012) – Auditor must use all information that became available to them Pacific Acceptance (1970): Auditors’ duties and responsibilities are to: Substantiate and very claims from management Use reasonable care and skill Check and see for themselves – don’t trust client Audit the whole year Appropriately supervise and review work of inexperienced staff – ASA 220 Properly document procedures – ASA 230 Rely on satisfactory internal controls Warn and inform the appropriate level of management Take further action where suspicion is aroused – ASA 240; Kingston Cotton Mill Structure plans and procedures so that discovery of material error or fraud is reasonably expected Be guided by professional standards – ASAs Corps Act Contributory Negligence:
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